Why Singapore's current 'inflation bliss' could be short-lived

Industrial production likely to disappoint.

According to DBS, industrial production index (Dec13) today may disappoint given that hope has been raised from the strong showing in exports. Headline non-oil domestic export growth for the month came in above expectation with a solid 6.0% YoY (9.2% MoM sa) expansion.

This may well suggest that industrial production probably has surged as well.

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However, the industrial production index is expected to post a contraction of 2.6% YoY. That’s right, a contraction. But it’s mainly due to the high base in Dec12 where output recorded the second highest reading in 2012.

Beyond that, the story from industrial production and export performance should be consistent, that is, a continued improvement in global outlook.

In fact, expect sequential growth in industrial production to be significant. Anything between 6-8% should not come as a surprise given the corresponding surge in NODX.

A part of that jump would come from the need to meet fresh surge in orders from China before the forthcoming Chinese New Year lull period. The other part, probably on a more sustainable basis, comes against the backdrop of the improvement in external demand.

The latter will be the thing to keep an eye on after the festive season, from February onwards. Separately, Dec13 CPI inflation announced yesterday came in lower than expected. Headline inflation registered 1.5% YoY, lower than the consensus expectation of 2.0%.

The story behind the moderation in inflation is the 2.1% decline in transport CPI inflation. And that most likely came on the back of the lower COE premiums in the month compared to the same period in 2012. Average COE premium in Dec13 is about 17% lower than the level 12 months earlier.

That said, the current “inflation bliss” will be short lived. Domestic inflationary pressure remains high. Rental and labour cost are still driving overall business cost higher. As long as business conditions remain buoyant and the labour market stays tight, the associated cost will get passed on to consumers.

Moreover, the COE premiums are climbing higher again. And it’ll probably get worse with average monthly COE quota likely to fall further by about 12.3% between Feb-Apr14, compared to the period Aug13-Jan14. This makes for further increase in premiums, which is currently hanging around the SGD 70-80K range (exclude motorcycle).

As policymakers are determined to reduce the traffic congestion problem and to encourage the commuters to switch to public transport, high COE premiums are here to stay for a long while unless demand moderates somehow.

And the pass-through effect on inflation will imply significantly higher inflation in the coming months. Our assessment is that inflation will rise sharply from April onwards when the base effect from the earlier car loan curb wears off. We maintain the view that inflation will zoom pass the 3% mark and approach the 4% level in April. Full year inflation will average 3.0% compared to 2.4% in 2013.